Saturday, December 31, 2011

Google defines a surprise as an unexpected or astonishing event, fact, or thing. And I expect a few big ones in 2012.

There are many kinds of surprises. There are pleasant surprises and unpleasant surprises, but often the unpleasantness comes from being on the wrong side of an unexpected event. I'm sure that being a client of Bernie Madoff or MF Global was quite unpleasant.

This year I expect to see more surprises of the Madoff/MF Global variety. There will be market-driven surprises as well as planned surprises. In fact, I may even have a few planned surprises of my own. ;)

But one thing all surprises, by definition, have in common is that you can't see them coming. Or, if they are predictably inevitable, at least you can't know the timing. Someone recently sent me a whole bunch of evidence pointing to a pretty specific date at which, presumably, the wheels would be "allowed" to fall off the bus. My response was, "if you can pick a date, then you invalidate that date as a contender."

We are all looking for "information leakage" as to the criticality of the systemic pressure we just know must be building. We look to the contango, the curve, the spread, stock and flow to leak us a hint about what kind of scramble might be happening on the other side of the curtain. But when I look back on other big Ponzi-like collapses, there never was much if any "leakage" before the event.

I think there are a couple of reasons why this is the case. In the last days before a Ponzi-like collapse, redemptions, conversions and exchanges are usually settled in an outwardly normal fashion. In fact, it is often those closest to the collapsing structure, like clients and counterparties, who are most in denial in the final days because they are directly privy to the superficial normalcy of transactions taking place.

It is at the precise point that the immediacy of collapse becomes unequivocally apparent to the inside operator that the plug is pulled and the music stopped. Operators pull the plug on redemptions all at once in order to either make off with the remaining assets, distribute them to favored associates, or in some cases, to preserve as large a pool of assets as possible. So any true "leakage" would have to be something of which the operator himself wasn't aware.

That first reason why collapses happen by surprise relates to the uncontrolled or unplanned collapse of a Ponzi-like structure. The second reason covers planned and controlled collapses. Planned or controlled collapses also happen by surprise, because that's how you get the maximum "bang for your buck" so to speak. I wrote this back in July '09:

The central banks of the world are well aware of this. It is why they have slowly, inconspicuously changed from net sellers into net buyers. This gradual shift is extremely significant, because as net sellers they were supporting their own fiat regime. But now as net buyers, they, as a group, are stressing it. Why would they do this unless they knew it was about to reset?

This fractional gold reserve imbalance is the one imbalance the media and governments do not want you to know about. This is the one that will RESET the entire system. This imbalance, once corrected, will make central bank fiat currencies sustainable once again. This is why they are net buyers! Here at FOFOA, we like to call it FREEGOLD!

Do I think this magnitude of a reset could happen overnight? Yes, I do. Why? Because that is the way you get the most "bang for your buck". Surprise is the order of the day! "Devaluations always happen by complete surprise as to exert maximum leverage effect."

A few days after I wrote that, John Rubino of dollarcollapse.com quoted me in a piece called A Tremendous Secret. In that piece he also included a historical romance novel excerpt about a surprise currency devaluation in 1560. Here's that bit from John's article:

The idea that we'll wake up one day to discover that the international monetary system has been "reset" and that our dollar/euro/yen savings have taken a huge hit (while the local currency value of our gold and silver soar) reminds me of an exchange in The Virgin's Lover, by Philippa Gregory (yes, I like historical romances). The year is 1560 and the young queen Elizabeth rules a country nearly bankrupted by a Spanish alliance that produced only war and debt. The English treasury has been systemically debasing its coins by clipping and shaving them, so that their face value vastly exceeds their gold content.

Elizabeth's advisors have decided that the monetary system needs to be reset, and have been importing borrowed gold. On the appointed day they intend to call in the circulating coins and replace them -- by weight rather than face value -- with newly-minted coins. This devaluation will transfer citizens' wealth to the government, impoverishing the former and enriching the latter. And if all goes as planned it will come as a surprise to most of the country.

But Elizabeth's lover, Sir Robert Dudley, learns of the plan and is not happy:

Elizabeth turned and smiled at him and took his hand and held it to her cheek. "My Robert."

"Tell me, my pretty love," Robert said quietly. "Why are you bringing in boatloads of Spanish gold from Antwerp, and how are you paying for it all?"

She gave a little gasp and the color went from her face, the smile from her eyes. "Oh," she said. "That."

"Yes," he replied evenly. "That. Don't you think you had better tell me what is going on?"

"How did you find out? It is supposed to be a great secret."

"Never mind," he said. "But I am sorry to learn that you still keep secrets from me, after your promises."

"I was going to tell you," she said at once. "It is just that Scotland has driven everything from my mind."

"I am sure," he sad coldly. "For if you had continued with your forgetfulness till the day that you called in the old coin and issued new, I would have been left with a small treasure room filled with dross, would I not? And left at a substantial loss, would I not? Was it your intention that I should suffer?"

Elizabeth flushed. "I didn't know you were storing small coin."

"I have lands; my tenants do not pay their rents in bullion, alas. I have trading debts which are paid in small coin. I have chests and chests of pennies and farthings. Do tell me what I may get for them?"

"A little more than their weight," she said in a very small voice.

"Not their face value?"

She shook her head in silence. "We are calling in the coins and issuing new," she said. "It is Gresham's plan -- you know of it yourself. We have to make the coins anew."

Robert let go of her hand and walked to the center of the room while she sat and watched him wondering what he would do. She realized that the sinking feeling in her belly was apprehension. For the first time in her life she was afraid what a man was thinking of her -- not for policy but for love.

"Robert, don't be angry with me. I didn't mean to disadvantage you," she said and heard the weakness in her own voice.

"I know," he said shortly. "It is partly that which amazes me. Did you not think that this would cost me money?"

She gasped. "I only thought it had to be a secret, a tremendous secret, or everyone will trade among themselves and the coins will be worse and worse regarded," she said quickly. "It is an awful thing, Robert, to know that people think that your very coins are next to worthless."

Reuters: 2012 to be year of "global reset" (03:21)

__________________________________________________________

Let the fun begin!

To kick off the Year of the Surprise, I am proud to announce my first very exciting surprise:

The return of the one and only… "Gold. Get you some." -- Aristotle!

I had to do an extensive Google search to locate Ari's last post. As far as I can tell it was on 1/31/05, almost seven years ago! But keep your eyes peeled. He will be right here very soon!

I know this will be a thrilling surprise to many of you, but for those who are less familiar with Ari, here are a few links to get you started:

For the past two years I have included music at the bottom of some of my posts. And then, periodically, I like to gather my favorites into a playlist with links to the posts. Here is where you can find playlists #1 and #2. And now for #3:

From Once Upon a Time in September, here's an amazingly seamless audio/video mash up medley, edited by DJ Victor Cheng, of the two biggest dance/pop hits from Information Society back in 1988: 'What's On Your Mind' and 'Walking Away'. Lead singer Kurt Harland, now 49, has been composing soundtracks for PlayStation and Xbox video games for the last decade and a half. 'What's On Your Mind' includes samples taken from two episodes of Star Trek:

From Moneyness in November, here's 'How It Ends' by the Denver-based band DeVotchKa. DeVotchKa scored the 2006 Oscar-nominated film Little Miss Sunshine which included this song. Try the snowflake button since there are no pictures:

"…For all that you've done
For you and your children
No longer shall you need
You always wanted to believe
Just ask and you'll receive
Beyond your wildest dreams
And you already know
Yeah, you already know how this will end."

From Unambiguous Wealth in December, here's 'Pretty Fly (For a White Guy)' by The Offspring from their aptly-named album Americana, followed by 'Little Acorns' from the (formerly) husband and wife team of Jack and Meg White called the White Stripes. The dollar can be a pretty fly store of value wannabe poser whenever Ben Bernanke's in the air, but if you wannabe truly prepared for the winter you need to be like the squirrel, taking little acorns, one at a time, back to your nest:

From Unambiguous Wealth 2 – The MF Global Chronicles, also in December, here's a cover version of The Turtles' classic, 'Happy Together', by the rock group Filter. The debtors of the $IMFS are very happy together with the savers who enable their low-inflation fiat expansion by saving all excess production in fiat and debt:

Happy New Year to all of you and all the best in 2012... year of many surprises!

JR wrote such an awesome "year in review" comment I just had to add it to the post. Enjoy:

JR's Year in Review!

It's kinda hard to express how excited I am to know that Aristotle, a person to whose thoughts and ideas FOFOA has devoted much time, is choosing to share again. Wow.

2012 is gonna be some kinda year.

One of the reasons I expect lots of great stuff in 2012 is because of how amazing the Year of the RPG was. I know some are sorta disillusioned with that message, as they seem to think it meant Freegold was unfolding. But I saw it as the theme of the year, and what a theme it was!!!

"On New Year's Eve I dubbed 2011 "Year of the RPG" in deference to Robert Zoellick's recent editorial in which he described gold as "a key reference point to allow people to assess the relations between different currencies." This description was so close to Freegold that Zoellick's FT editorial led us to an additional name, "Reference Point Gold" or Freegold-RPG.

Throughout the year I posted "RPG Updates" every time the ECB published its quarterly Consolidated Financial Statement for the Eurosystem in which it revalues the system's reserves to market value denominated in its own currency, the euro. Such "marked to market" (MTM) revaluation is an important first step in allowing gold to be "a key reference point to allow people to assess the relations between different currencies."

FOFOA discussed some evolving CB/nation attitudes about the role of RPG as an international reserve in Go Go South Korea.

=================================

FOFOA got into the importance of a stable global reference point for value via the concept of purchasing power parity in Reference Point Revolution!

================================

FOFOA detailed some of the history with the reference point under Bretton Woods in The Long Road to Freegold and wonderfully expounded on this theme of international reference points with a wonderful discussion of the historical use of gold as an international reference point and the importance of RPG to establishing systemic stability and balance of payments through the brake and spur forces of price discovery in a flowing international physical gold marketplace in Once Upon a Time. This was a great continuation of the discussion of balance of payments in A Winner Takes the Gold.

"In the video Partee said that he wanted the Gold Eagle coin as an "indicium of public attitudes toward financial conditions in the country" and that "you destroy that 'indicia value' when you have a gold standard." What do you think? Does this sound at all like Robert Zoellick's recommendation to use gold as a "reference point?""

In Open Letter to Ron Paul , FOFOA turned the lens on the US, contrasting the ECB's embrace of RPG and exploring the idea of the US revaluing its gold to market value - Ron Paul Gold?

And then in The Return to Honest Money, FOFOA dove deeply into the money concept and explored the commonality of the money concept, RPG and the ideas of those such as Mises, Menger, Hayek and others, explaining:

"Mises: No government is, however, powerful enough to abolish the gold standard. Gold is the money of international trade and of the supernational economic community of mankind. It cannot be affected by measures of governments whose sovereignty is limited to definite countries. As long as a country is not economically self-sufficient in the strict sense of the term, as long as there are still some loopholes left in the walls by which national governments try to isolate their countries from the rest of the world, gold is still used as money. It does not matter that governments confiscate the gold coins and bullion they can seize and punish those holding gold as felons. The language of bilateral clearing agreements by means of which governments are intent upon eliminating gold from international trade, avoids any reference to gold. But the turnovers performed on the ground of those agreements are calculated on gold prices. He who buys or sells on a foreign market calculates the advantages and disadvantages of such transactions in gold. In spite of the fact that a country has severed its local currency from any link with gold, its domestic structure of prices remains closely connected with gold and the gold prices of the world market.

Did you catch that? In his magnum opus, published in 1949, Ludwig von Mises described Reference Point: Gold, which is the underlying nature of a global marketplace that reveals where our monetary evolution is actually heading! "

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And in the best Post of the Year as far as I am concerned, FOFOA grabbed the "money theme" embraced in Return to Honest Money and fully developed it in Moneyness, tying it all together nicely. IMO this is the post of 2011, and it's the culmination of most of the Year of the RPG posts I referenced above (who knew the MMT stuff was a sideshow to merely illustrate the main point):

Well, there you have it! The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself. As FOA said, money is "a value stored in your head!" Money is not something you save. "Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends."

But what does this have to do with me in 2011? I can almost hear you thinking this question now. Well, I'm going to share a secret with you. The big secret is that the people's money is simply credit. And by "the people's money," I mean our money, the real producing economy's money. The monetary base is only the banks' and governments' money, except for that little bit of cash you keep in your wallet for emergencies. Let me explain...

Saturday, December 24, 2011

"North Korea’s so serious about mourning Kim Jong Il that it’s cancelled Christmas. That is to say, Pyongyang’s furious protests over South Korea’s plan to display Christmas lights near the two sides’ border has persuaded Seoul to cancel the display as a gesture of good will.

"Psychological warfare" is how the communist regime of North Korea described the capitalist South’s plan to switch on the lights topping three tree-shaped steel towers at Aegibong within two miles of the North-South border, reported the Daily Telegraph.

Seoul’s Unification Minister Yu Woo-Ik, who is responsible for cross-border ties, emerged from a meeting of senior South Korean officials Tuesday to announce the holiday lighting display would be postponed out of respect for the official mourning period announced by Pyongyang."

Fall on your knees: official mourning period "fake tears" celebrations in the North

Monday, December 19, 2011

The Dear Leader of North Korea has passed away. In tribute to this great man who stood strong against the Imperialistic West, I'd like to present this AWESOME travelogue for anyone who has always wanted to visit the tasty land they call "the soon to be reunified" north part of Korea.

I just can't tell you how AWESOME this video travelogue is. Pop some popcorn now because it's about an hour long. And trust me that I wouldn't post this if it wasn't worth watching.

The best part about North Korea is that you never run into disgustingly rich people who make you feel self-conscious about the size of your own wallet. That's because they don’t have rich people in North Korea! They have eliminated all of the Western problems of credit money and savings!! The private sector in North Korea has no abusive powers such as issuing credit money from thin air or selling savings to the austere. That power has all been taken back by the government!!! The King is dead! Long live the King! Yay!

Sunday, December 11, 2011

Sometimes I write post-length comments that would be more useful as actual posts. Here's one…

Hello Edwardo,

Thank you for the ZH link. I suppose I need to be more specific when I refer to "the ZH/GATA CB thesis." First let me state that Zero Hedge and GATA both provide a great service and they both do fantastic work, ZH comments section notwithstanding. It is their underlying thesis about fiat currencies and central banks in general that I have a problem with. And this is not a problem with only ZH and GATA, it is a problem with the entire hard money camp.

Their foundational thesis is that fiat currencies and the CBs that manage them are the most fundamental flaw in today's system from which all other problems flow. This directly conflicts with my thesis that using the same medium in both the primary and secondary monetary roles is the fundamental flaw from which all other problems flow. My thesis applies to both hard and easy money systems. Their thesis points to the CBs as the bad guys. My thesis holds up a mirror and says, "We have met the enemy, and it is us."

One of the biggest struggles I observe in newish visitors to my blog is that they instinctively try to reconcile everything they learned from the hard money camp—ZH and GATA being two bright stars there—with what they read here. Their effort inevitably leads to contradictions that cannot be resolved. And because ZH, GATA and the rest of the hard money camp is so much more ubiquitous than my little blog, they win by default in minds that are unable to think for themselves.

Here are a couple of the irreconcilable concepts found on this blog that noobs must either reject or ignore in order to hang on to their ZH/GATA CB thesis.

1. Remember when Aristotle wrote this? "In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole."

Have you ever seen anyone in the hard money camp write anything like this? Or can you imagine them ever doing so? Yet this is one of the core fundamentals necessary to understanding Freegold.

2. And FOA wrote this: "Several years ago, many gold bugs and gold advocates missed the path as the trail turned." "Yes, the war now is between the Euro and the dollar! The Washington Agreement [a Central Bank agreement] placed gold 'on the road to high prices'." "The war between gold and the dollar has been over for a while now… Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it. A market caught between how Western perception thinks gold's price should be "discovered" and at what price level trading in physical gold craters the entire paper structure… This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed."

Again, have you ever seen anyone at GATA or ZH write anything like this? Or can you imagine them ever doing so? This view is so completely antithetical to their most fundamental thesis. And whenever we see the price of the paper gold market fall under the force of short-term manipulation, their instinctive explanation is that the CBs are puking up physical to suppress the price of gold.

This particular ZH article you linked, Edwardo, is superb with regard to this blog, and especially to the topic of this post, Unambiguous Wealth. Tyler notes:

"…there should never be any debate over who owns a given physical asset, as replicated ownership (note - not liens) effectively means someone stole the gold (or there was counterfeiting involved) and was never caught... until MF Global finally expired of course."

This is, of course, the problem with holding your "wealth" in the system. This is an extreme example, where the wealth being held in the system was presumed to be unambiguous—and physical—and yet the system itself imputed ambiguity onto the ownership of that asset, which was only discovered once someone went bankrupt. Possession is the timeless attribute of wealth because true possession is unequivocal. But the system apparently equivocates its own illusory version of possession when it comes to bankruptcy. Therefore nothing held within the ($IMFS) system can be unconditionally qualified as "wealth" under FOA's definition.

This guy, Jason Fane of Ithaca, New York, simply wants to get his gold out of the bank vault and into a non-bank vault at Brinks. Remember, this is one of GBI's big selling points. Your gold bars and coins are stored in non-bank vaults that have no reason or even ability to use them for other purposes like rehypothecation. But even better than that, with gold, you can actually take true possession of your wealth yourself! A million dollars in gold can easily fit into a small box. If that sounds dangerous or risky to you, just take a look at what's happening inside the system today! HSBC's hands are tied until a judge rules on whether Jason can move his own gold that he thought he already "possessed."

This MF Global bankruptcy is like a shockwave spreading out over the whole marketplace. It's like an EMP that could fry the matrix in a flash, once people begin to understand its implications. It's already had far-reaching consequences.

One group that has so far been disproportionately affected is the non-bank physical gold dealer network. Many large and small, retail and wholesale gold dealers used the COMEX paper market to hedge their physical business. Say someone walked in and sold a dealer a thousand ounces of krugerrands. That dealer would immediately go to his MF Global online account and short ten COMEX futures contracts worth 100 ounces each.

So these dealers often have large cash balances sitting at the ready so that they can earn the spread from any customer without taking the price risk. It was not their contracts or COMEX positions that disappeared when MF Global went bankrupt, it was their large cash balances. Active positions were rolled over to other clearing houses, but the cash disappeared.

I have heard about one large gold dealer that had $5M in cash at MF Global. Many smaller dealers had hundreds of thousands sitting there. And they were all with MF Global for one reason and one reason only, Lind-Waldock. "Lind-Waldock was the Charles Schwab of commodity brokers" according to one of my readers who trades commodities. It was the longest-standing discount commodity broker in the world. It had been around for more than 40 years and many big names used Lind-Waldock. It was bought by MF Global's parent company back in 2005, but up until a few months ago, the commodity trading website still said Lind-Waldock at the top.

So for whatever reasons, word of mouth, residual credibility or whatever, the physical bullion dealer network was disproportionately with MF Global when it filed for bankruptcy. And ever since this went down on October 31, it has had an impact on the physical market in the United States. The liquidity these dealers used to hedge their business is not available right now.

So imagine that you walked into a dealer to buy or sell 50 gold eagles today. When he makes that deal with you, he is now taking on position risk. So he's going to have to pay you less for your eagles—or charge you more if you're buying—in order to lower his risk. Previously he would have hedged that risk on his MF Global account. So if you've noticed that the buy-sell spread on physical has gotten wider over the past month, that's why.

(Turd Ferguson reports today that: "Sources tell me this is already happening as bulk physical gold is currently being sold and delivered at $1950/ounce." h/t burningfiat)

And now that you've got that picture in your mind, imagine the dealers' conundrum with intraday $200-$300 price swings, or if the market mechanism for paper gold price discovery breaks down entirely. Some of these dealers have already said they will never go back to paper hedging, period, even if they get their money back! Paper gold is nearly finished.

I'd like to mention now that Jim Sinclair has been absolutely ON FIRE talking about the implications and the shockwave of consequences emanating from the MF Global bankruptcy. In his latest great interview he says that by putting the OTC derivative positions of a bankrupt clearing house ahead of its client's deposits, this case will ultimately break the very market mechanism for price discovery. He says the system ($IMFS) is already broken, but whereas Lehman Bros. was the "Lehman event" for Main Street, MF Global is the "Lehman event" for the insiders. When your clearing house becomes a questionable counterparty, it's over.

He says the only reason it's still working at all (the clearing system necessary for settlement and price discovery) is "rank ignorance" on the part of the participants as to the implications of this MF Global bankruptcy case. And he's not just talking about gold and commodity trading. He says that virtually any money held anywhere within the system right now exists only insofar as the insiders have yet to figure out the dire implications of MF Global. This is a crisis of confidence. Remember where I said demand/velocity can turn on a dime?

Jim says there's no way to know if the clearing house being used by your broker or money manager is using your funds as collateral for gambles on its own behalf. And the way the law is written, the bank that is lending money to your clearing house apparently has the primary claim to your funds, ahead of you, in bankruptcy.

Most people, when they sign up with a money manager, don't read all the small print. And so they don't know about these clauses that are in virtually all of these types of agreements, or if they do read them they either don't understand them or they simply live with them. Here is the clause from the MF Global agreement:

"7. Consent To Loan Or Pledge

You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control."

The term hypothecate comes from your creditor's "hypothetical control" over your asset until you pay your debt. To "rehypothecate" an asset, your creditor is giving "hypothetical control" of your asset to a third party, another creditor, in exchange for what is essentially a gambling loan to himself. This is technically legal, and if your broker or clearing house is international, it may be rehypothecating your entire account, even if you haven't borrowed a dime.

As I said, most people don't even know about this. But the big hedge funds have teams of lawyers that go through these contracts and strike out such clauses before they ever fund an account. And those that did got their money back right away. This happened with Lehman Brothers as well. And with Lehman, some hedge funds that failed to strike out these clauses are still fighting to get back some of their money.

As sick as this all sounds, it's not only technically legal, it's rampant! Here is what Reuters found as to the proliferation of what they termed "hyper-hypothecation"…

Nor is lending confined to between banks. Intra-bank re-hypothecation is also possible as evidenced by filings from Wells Fargo. According to disclosures from Wachovia Preferred Funding Corp, its parent, Wells Fargo, acts as collateral custodian and has the right to re-hypothecate and use around $170 million of assets posted as collateral."

Here's a question. Say you have your money with Conservative Wealth Management in Los Angeles who is churning you a nice, conservative 3% a year on your $200,000 retirement account. Where did "Conservative" put your money to get that return? And whoever Conservative put it with, where did they put it? Where is your money right now? How many different entities are using your assets as collateral to churn themselves a high-risk return? And does anyone else have "hypothetical control" over your money in the event one of the counterparties in the chain goes bankrupt? Jim says you'd have to be a "past master of actuarial accounting" to know.

It is very difficult for shrimps to think like Giants. Usually we just follow in their footsteps. But there's something very important that you really REALLY need to understand—right now—about people with really big money. And that is that they are much quicker to panic than we are. Big money is nervous money. Always. They live much closer to the panic end of the panic-calm spectrum. While we shrimps sleep soundly, big money wakes up in the middle of the night with cold sweats.

We talk about making a return on our money. But the truly wealthy are first and foremost concerned with preserving their capital. Earning a return is a secondary concern. Big money stays invested mainly because they are not losing money. How many fund managers beat the index in the long term? Nary a one. Yet their clients stay "invested" as long as (at least) they aren't losing money.

MF Global and rehypothecation will move these people ever closer to the panic button. It merely requires time for the implications to sink in. Apparently they are not invested in the location they think they are. Their wealth is not parked where they think it is parked. Think of it like a valet. What if you took your claim ticket and tried to fetch the car yourself? What if you found an empty space where your Bentley was supposed to be parked?

I was emailing with a friend yesterday about this whole MF Global thing, and he had a great analogy for this. Compare these big money folks to the average guy who rides the bus. You miss a bus, so what? It's inconvenient but another bus will come. It takes a long time to sink in that another bus isn't coming. It's not until there is such a big crowd waiting at the bus stop for the next bus that people start thinking "even if a bus comes there are too many people to fit on one bus." In that mindset the surest way to cause a riot is to send one bus i.e., not enough buses. You have to fight to get to the front of the queue. This is a bank run mentality.

And this is a key difference between the average guy and the big money. Big money isn't used to being kept waiting. Big money owns the "bus company". They know the buses aren't going to run before the little guy. They panic early. There was an electronic bank run around the time of the Lehman collapse. That was one of the reasons why governments around the world stepped in with fresh deposit guarantees. But there were no lines outside the banks to alert the average guy to what the Giants were up to.

Right now gold is $1,712 per ounce. If you have $200,000 in ambiguous claims floating through system-space, your account is right now worth 116 one-ounce gold coins of unambiguous wealth. But here's the thing. You are never going to beat the big money to that panic button. There are enough gold coins on the market right now that you could get your 116 of them without affecting the price. But if you're waiting for the first signs of panic, you're not going to get anywhere near 116. You'll be lucky to get six or seven.

There's only one way to beat the Giants to the gold, and that is to run in front of them. Jim ended his interview by saying, "Take care of yourselves, because nobody else is gonna do it for you. Have what you own, otherwise you don't own it." What a great interview!

But, unfortunately, Jim also subscribes to the hard money camp CB/fiat thesis. And with this view, he comes across as colorblind to the difference between the ECB and the Fed/BOE, the difference between the euro and the dollar, the difference between a gold standard and Freegold, and the future system that is already unfolding. The problem with his view is that, while it does deliver solid individual advice, it leads to poor macro conclusions and predictions.

For example, Jim and I both agree that the $IMFS is kicking the can down a dead end road. The system is basically dead already, and the MF Global bankruptcy case may very well turn out to be the last nail in the confidence coffin. But he concludes that this obviously means a return to a commodity currency based on historically similar occurrences.

Like others in the hard money camp, he envisions this reversion to a commodity base being crafted by some of the same people running the failed current system through a revision of the unit of account function at the super-sovereign level. Jim says, "When things become extraordinarily difficult, you'll find that any attachment to gold, even if it's via a virtual reserve currency, and a global Western-world M3 for valuation, it will be considered to be a solution and probably will be a road out."

"Virtual reserve currency" means something—like the SDR—that's primarily a unit of account for the purpose of providing monetary stability. But with the primary and secondary media of exchange becoming separate but symbiotic counterparts, stability will be automatically achieved, and a "commodity-based" super-sovereign unit of account comparing fiat M3 with a centrally managed gold price will be completely superfluous and unnecessary (i.e., as unused as the SDR).

Jim Sinclair: "You can fix a market, but wait 'til you see what you have to do to fix a whole system."

Eric King: "One final question, Jim. We've talked about gold being revalued. When that day comes, and there is a gold-backed currency once again, will the world be able to turn itself around here?"

This is two people discussing a possible solution to a serious problem at the 11th hour. What they don't understand is that this very scenario—$IMFS collapse—was faced 32 years ago and a solution was crafted at the highest levels. That solution took 20 years to launch (at great cost, mind you) and today it stands at the ready. If you read too much ZH and thereby think the European debt crisis changes things in some way, guess again. The European debt crisis is a symptom of the dying $IMFS, not the Eurosystem. In every way this is true.

Jim talks about the sociopathic bond vigilantes (a relic of the $IMFS) who can take entire countries down through the debt markets. He talks about them waging WWIII in the bond markets every day. If you want stability, insulated from these sociopathic traders, you don't want some slipshod unit of account basket solution patched together by the IMF at the 11th hour. You're more likely to fall back on the long-line plan that took two decades to implement and another decade to season.

The Achilles' heel of the $IMFS is that debt is the system's official store of value and foreign exchange reserve. And bearing this flaw, savers, currencies, banks, governments and even entire countries are all vulnerable to the inevitable failure of the debt.

The problem with debt performing these functions is that debt is a derivative of the currency itself. Currency moves opposite the flow of real goods and services. And with a derivative of the currency acting as the only counterbalance to uneven trade, there emerges the exact opposite of a natural adjustment mechanism for correcting trade imbalances.

With debt as the store of value and official reserve asset, the party producing more real goods has no way to record his net production (savings) other than lending that excess currency back to the consuming party, encouraging him to consume more, and recording the new debt. A true adjustment mechanism makes the balance swing back and forth. But the debt system requires an infinite debtor. So the system is designed to fail. The debt backing the system is designed to fail. And as the official store of value and reserve asset, the savers, currencies, banks, governments and even entire countries are destined to fail in the end… under the $IMFS.

Enter the euro. According to the ECB website, the road to the euro began in 1962, shortly after the launch of the London Gold Pool which aimed to keep gold cheap in support of the $IMFS. The French were the first to pull out of the Gold Pool and also the first to mark their gold reserves to market in 1975. By 1997 even the Germans were marking their gold reserves to market in anticipation of the euro launch date.

Today the Eurosystem still operates under the same $IMFS, yet it declares proudly on line 1 of its weekly statements that gold is its primary currency reserve, marked to market every quarter. And anyone can download the data from its website and plug it into a spreadsheet. If you chart it, it looks like this:

The point is, there's a turn-key problem-solving system waiting in the wings. So whenever you hear anyone in the hard money camp or the Anglo-American press talking about something that sounds like the SDR with "gold backing" (watch out for that word "backing") don't buy it for a second. They simply don't have the full picture and, therefore, don't know what they're talking about when it comes to macro solutions. But even so, they're still right when they recommend that you get your butt out of that reclining black office chair and take personal responsibility for your wealth. Hear hear Jim:

"Take care of yourselves, because nobody else is gonna do it for you. Have what you own, otherwise you don't own it."
_________________________________________________________

**ChristmasFundraiser**

Old FOFOA needs your help again. It's been 10 months since my last fundraiser, and I know there are a lot of new readers out there. Yeah, I did drop a hint or two back in August, but to tell the truth, that didn't turn out to be much of a fundraiser (perhaps because of that Scary Correction). There are a few of you who have been very regular and generous in your support! You know who you are, so THANK YOU THANK YOU!! But for the rest of you, I could really use your support right now.

In the spirit of full disclosure, I am living the austere dream! I have no debt, low expenses and a modest stack of gold coins. And I'm able to be here writing this blog thanks to your generous support. For the past couple of years, donations alone have been covering my expenses. But lately they have only been covering a portion of my expenses, and now I've run down my cash reserves to the point that I need to do something, either seek an income or dishoard some of my savings prematurely.

With 2012 right around the corner, we've got a year of heavy events in front of us; a Presidential election, the euro debt crisis, helicopter drops, etc… So if you appreciate this blog and having me here to do what I do, and if you are one of the thousands of readers that checks in every day, please consider making a donation, a contribution toward keeping this going into 2012.

UPDATE: Thank you to the 172!! of you who donated so far! Bless you, and Merry Christmas!

Sincerely,
FOFOA

To all savers, the $IMFS asked me to pass along this (love letter?) message…

_________________________________________________________

UPDATE:

New GLD Puke Alert from Lance Lewis

Lance: "As long-time readers know, a one-day decline of over 1 percent in GLD’s holdings is what I call my “GLD Puke Indicator,” and it flashed another “buy signal” again today, indicating that we are within + or – a day or two of an important low in the gold price.

As you can see from the chart, this indicator is nearly foolproof when it comes to marking important lows in the gold price. Now, recall that we can sometimes see “clusters” of these signals around major lows in gold rather than just a single signal, but we haven’t seen such a cluster since back in 2008 during that epic panic.

There has also been one false signal back in early December of 2009, which came just a few days off a peak, but there has never been a false signal that has occurred months after a gold price peak has been put in like this one is and definitely not with MarketVane’s bullish consensus below 75 (and especially not at 58 like it is now).

In fact, the closest analogy we have to the current low in the gold price was the 60% MarketVane reading back on July 20, 2010, which came 8 days before the July 28, 2010 “GLD puke indicator” signal, during which period the HGNSI hung around 9%, vs. the current 0.3%.

You will recall that this low in gold that was marked by the intersection of these indicators in July of 2010 just below $1200 was also THE low for the gold price ahead of the Fed announcing the launch of QE2 in November of 2010.

Will history repeat with this week’s low ahead of QE3’s launch in early 2012? Perhaps it won’t repeat exactly, but I suspect it will most certainly rhyme."

Thursday, December 1, 2011

In the present monetary system, wealth is commonly held as ambiguous claims against the economy. We call it stocks, bonds, money market funds, mutual funds, etc… People hold their wealth in this way for the promise it makes of more wealth forthcoming! Sound familiar?

Now, when I say that there will actually be much more wealth forthcoming for those with **unambiguous** ownership of physical gold today, some people feel compelled to argue that their ambiguous claims have a better history of "more wealth forthcoming." And this argument is not without merit.

It is true that stocks and bonds did very well in the '80s and '90s. In fact, my own father is still waiting for the Dow to get back to 14,000 to regain the wealth he thinks he lost. The Dow beat CPI inflation hands down throughout the '80s and '90s, and that's how you know you made a good investment, by beating inflation.

The Dow entered the 1980s at $824. So if your $824 investment in 1980 had perfectly tracked official inflation, you'd have had $1,722 in 2000 and $2,264 in 2011 (according to the BLS inflation calculator). But in the Dow, your investment became $11,722 by January, 2000, and $12,045 today. So even though it hasn't done much in the last decade, the Dow still beat inflation by a large margin over the last 30 years.

Bonds also had a huge 30-year run as the Fed lowered rates from 20% down to 0%. Remember, as interest rates are lowered, the price of bonds issued at the previous higher rates rises. So bond investors do very well in a falling interest rate environment.

When we compare investment gains to inflation, what we're really doing is discounting the devaluation of the numéraire over the period of the gain. In other words, we are gauging our gain against the physical plane of goods and services which is what really matters. Another way to look at it is that the dollar was devalued against goods and services while your investment was revalued. This is what I meant when I recently wrote the following:

"I cannot see a dollar collapse without a simultaneous revaluation of something else. It's a seesaw. The dollar isn't collapsing against gold. It is collapsing against the physical plane of goods and services. That's the fulcrum, not gold. Dollar collapse is the force, goods and services the fulcrum, and gold the load. So gold is revaluing against goods and services. The gold revaluation is against the physical plane so as to fill the reserve void left by the dollar's collapse."

So why did the Dow revalue so much in the '80s and '90s and then level off in the noughties just as gold began its rise?

As it turns out, FOA wrote a post about this in November of 2001:

FOA (11/3/01; 14:39:16MT - usagold.com msg#129)An "inflationary depression" is in the cards -- a "price deflation" doesn't have a chance!

----------------------

Back in the mid to late 70s Sir John Templeton always drove his point home for investors watching Luis Rukiser's show. (how does one spell his name,,,,, we always called him Lou Baby (smile))

Sir John, living here on Layford Cay, kept saying that the Dow of the 70s was very underpriced and would soar. He was the most absolutely correct person stating that then! But more into the mechanics of his perception: he knew that anyone buying the Dow and waiting a decade or more, would gain way beyond mere price inflation. Monetary inflation would eventually drive the perceived virtual wealth of US stocks ever higher. So high, in fact, that their percentage gains over price inflationary gains would be incredible. They were!

Truly, what John was referring to was the effects that simple "passive inflation" has on paper assets; especially in a "reserve currency's" domestic market. In this; real price inflation is mostly exported by importing "real goods" competition. This happens as we export excess credit dollars to buy things. It also has another effect; some of that same exported printed money flows in a circle and joins native investors' buying of local paper assets. When this process first starts, "passive inflation", in the form of massive money creation that's far beyond real price inflation, allows one to gain "virtual paper wealth" even before the markets price out the gains. That is; the Dow stays cheap at first then eventually rises to absorb the money inflation! As long as prices don't rise too much.

People that followed his advice, accumulated the Dow over a decade or more; buying "virtual wealth" before the fact! Stock investors made a killing by positioning their assets where this created "passive monetary inflation" would eventually end up. Even though hard money players laughed at them all thru out the 70s, 80s and early 90s! Look who is laughing now? Stocks tromped hard money plays hands down for over 20+ years! Even considering the latest fall on Wall Street.

----------------------

I want to jump in here and add a little more explanation of what he was talking about. FOA's "passive inflation" was money inflation that didn't spill over into consumer price inflation (CPI). The reason it didn't spill over is in my recent post, Moneyness. (See also: Credibility Inflation) FOA says we imported "real goods competition." That is, we ran a trade deficit and ended up with foreign goods that competed with our own domestic goods keeping all the prices down.

And because we were running a trade deficit, those dollars that paid for it came back to the US buying up the stock and bond markets rather than the price of consumer goods. So the more easy credit we created, the more our paper investments would eventually rise, with a time lag that gave "early adopters" a gain far above consumer price inflation. Now, back to FOA:

My friends:

Today, this same "virtual wealth" effect has been created again and is located in physical gold bullion. I believe Sir John has already made part of my point but I will repeat.

When a currency system comes to the end of its reserve use, I'm speaking politically, its domestic market will come to a point where it can no longer export "real price inflation" in the format of; "shipping its excess currency outside its borders". This happens because internal money inflation, that is super currency printing, is increased so much that it overwhelms even its export flow. Worse, even that export flow later tumbles as the fiat falls on exchange markets.

The effect is that local "passive inflation", built up over decades and fully reflected in "Sir John's" paper assets, spreads out as "aggressive inflation" and hyper price rises begin. In this action, the very same wealth effect that was eventually priced into "John's" Dow stocks and other assets, begins a long march of being priced into real gold.

Anyone that has accumulated physical gold over this past long period was doing the exact same thing Dow buyers of the late 60s and early 70s were doing: ------ saving "wealth" as unpriced "virtual wealth" stored up over that "passive inflation" period. ---

----------------------
As "political will" begins to impact the economies of the US,

our old "virtual wealth" that is no longer in the form of "passive inflation" nor limited to the currency, and is openly displayed in our vast sea of paper assets values including stocks, bonds--------

must now be defended in the open with official printed money flow.
---------------

Me again. Notice he says, "When a currency system comes to the end of its reserve use, I'm speaking politically…" and then, "As 'political will' begins to impact the economies of the US…" What he's talking about is the political will of U.S. trading partners to support our trade deficit by stuffing their reserves with U.S. Treasuries, and again it's in Moneyness that this is ending today. At the time FOA wrote that, the "political will" of Europe had already shifted away from the dollar, today it's China.

More from FOA:

The "virtual wealth" in gold, saved over years by patient investors, will also be priced to market in this process.

Never mind that during the Dow years paper gold markets could not work in parallel with all the other asset gains; it couldn't. Hard money players, trying to somehow play the Dow's game, never caught on to what was happening. Instead of buying "virtual wealth" by saving real gold; they bought leveraged bets that gold would be priced correctly during the "paper asset" years.

Obviously, this "trade" failed hard money players as the waves of value from other paper gains and derivatives leverage were employed against their every long bet on gold. Not only that; the "virtual wealth" in gold was never opened for them with the super price inflation they all thought was coming during that era!

Now that the paper game is about to stop for the Dow, it will also cut off the leverage of gold bets. Just as the real game begins.

The reason for this is that our massive, decades-long gains in our stock markets did not bankrupt the leverage in the money system. Whereas any massive rise in physical gold values cannot be priced into "derivative gold" without crashing the system.

Remember; in political inflations, money is printed to save the assets as they are currently priced; not create new loses by liquefying the leverage that's countering your play!

This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed.

------

In this perception USAGOLD has been guiding its clients, and now the world, in much the same way Sir John did decades ago.

"Buy what has value at the greatest discount and wait for the politics of money to price your new savings correctly"!

The politics of wealth today is centered around gold bullion and only gold bullion: that is where the wealth and power will be manifest: this is where the gains will be! To bet on the rest of the hard market; is to bet against the coming inflation making your asset whole!

Place as much of your wealth in physical gold as your understanding allows and save this "virtual wealth" of the ages today: waiting for it to become real wealth, priced correctly in the marketplace, tomorrow.

Make no mistake, the wealth is there "but only there in bullion"! Because a free bullion market cannot be denied or controlled

----- when it stands between the opposite goals of political powers! ---

In this: it will separate from the politically crushing reality the current dollar-based paper gold markets represent. The premium on bullion will soar!

The "Political will" of old world Europe is about to help make our investment real. For myself, a large percentage of my wealth is being saved by going with the evolution of paper moneys: not against!

This trend is visible now and based on the forward flow of human affairs, not the backward rules of money theory!

Our future is today; if not just around the trail!

Sir Douglas; aka FOA

your: Gold - Trail – Guide

Were you able to follow all of that? This little bit gets right to the heart of the matter; the difference between paper gold and real physical bullion. Remember from Moneyness that the people's money throughout history has been credit denominated in something. The majority of exchanges up until the invention of paper money were largely on the basis of credit and trust, with accounts later cleared and imbalances settled in metal. In this way, a relatively small and stable monetary base serves a much larger economy.

But today we use that credit, that debt or liability asset as our savings, not just for trade. Now I want you to think about the fundamental difference between claims denominated in paper money versus claims denominated in gold metal. The claims denominated in paper money can be liquefied in actual base money terms by the central bank. But the claims denominated in actual gold metal cannot.

FOA: "Remember; in political inflations, money is printed to save the assets as they are currently priced… This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed."

So claims denominated in dollars must be saved, "made whole" for the sake of the system, but claims denominated in physical metal CANNOT be saved without destroying the banks. The entire international monetary and financial system is in dire need of something to save it right now, wouldn't you agree? The whole system appears insolvable as presently priced, a Catch-22 of incomprehensible dimensions.

But the solution is not so incomprehensible, and it was never up for debate. It was baked into the cake long ago, as FOA pointed out. You may personally prefer that they simply let the system fail. But "they" are central bankers, so we can safely predict they will try something. And that something is the only thing that can happen.

The U.S. dollar and gold will both be massively expanded to recapitalize the system, and life will go on. The difference being that the dollar will be expanded in volume while physical gold bullion will be expanded through value. And through this process, all ambiguous claims, both dollar-based and metal-based will become virtually worthless, while unambiguous gold ownership will literally explode in value.

This is an historical first. Today is the first time in history where a massive transfer of wealth will transpire through the conversion of all gold on the planet into unambiguous ownership. Think about this long and hard. More than 90% of all the gold stock has been mined in the last 200 years. During that time, unambiguous, discrete (and discreet) ownership has entailed an unnecessary expense. During the gold standard years gold was the money, so it was all unallocated and ambiguously owned. Even today, most of the gold in the BB system is still on pallets, a remnant of the gold standard years. But that is changing.

It is more important than ever, right now, to make sure that you unambiguously own discrete pieces of gold. You don't want to just own "a bar of gold" at the bank, you want to own bar number JM4835 or whatever. And you certainly don't want to own a fractional interest in a bar when you can own coins down to one gram. Better yet, have your gold unambiguously in your possession, or at least under your control outside of the banking system that is still struggling to cope with this change.

Have you ever wondered why bullion banks have been opening new or decommissioned vaults and clearing space for more gold? It's not because there's more gold coming into play. It's because it takes much more space to store unambiguous, allocated gold than it does to store ambiguously owned pallets of "gold". From my post The View: A Classic Bank Run:

Here's an interesting item that I struggled to interpret until I really thought it through. Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.

_________________________________________________________

Taking personal responsibility for your life's savings when you've always counted on "the system" to safeguard it for you is not an easy step to take. Converting your savings from ambiguous claims in the system (either dollar or gold-denominated) into unambiguous wealth is not without considerable hassle, risk and expense. But it has never been more important than right now. Conversion is early adoption, like buying the Dow sub-1,000. Conversion to unambiguous pieces you can possess is front running the reset, the global revaluation that could come at any moment. As a long-time reader wrote me just today: the window will be closed soon.

He also wrote this:

"A recent 'convert' to protecting his life savings, a friend said, 'wow, it hit me last night......'

I said, 'what?'

"Well, now I understand, all the policymakers are doing currently is making my gold worth higher in purchasing power as they annihilate my currency.....thus, why the heck would I hold something that they are destroying willingly!"

Yup, that about says it all!
_________________________________________________________

**ChristmasFundraiser**

Old FOFOA needs your help again. It's been 10 months since my last fundraiser, and I know there are a lot of new readers out there. Yeah, I did drop a hint or two back in August, but to tell the truth, that didn't turn out to be much of a fundraiser. There are a few of you who have been very regular and generous in your support! You know who you are, so THANK YOU THANK YOU!! But for the rest of you, I could really use your support right now.

In the spirit of full disclosure, I am living the austere dream! I have no debt, low expenses and a modest stack of gold coins. And I'm able to be here writing this blog thanks to your generous support. For the past couple of years, donations alone have been covering my expenses. But lately they have only been covering a portion of my expenses, and now I've run down my cash reserves to the point that I need to do something, either seek an income or dishoard some of my savings prematurely.

With 2012 right around the corner, we've got a year of heavy events in front of us; a Presidential election, the euro debt crisis, helicopter drops, etc… So if you appreciate this blog and having me here to do what I do, and if you are one of the thousands of readers that checks in every day, please consider making a donation, a contribution toward keeping this going into 2012.

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Disclaimer

The above is presented for educational and/or entertainment purposes only. Under no circumstances should it be mistaken for professional investment advice, nor is it at all intended to be taken as such. The commentary and other contents simply reflect the opinion of the author alone on the current and future status of the markets and various economies. It is subject to error and change without notice. The presence of a link to a website does not indicate approval or endorsement of that web site or any services, products, or opinions that may be offered by them.